Singapore : Moody’s Investors Service has assigned a Ba2 corporate family rating to Tata Power Company Limited (The) (Tata Power).
The outlook is stable.
“The Ba2 corporate family rating assigned to Tata Power reflects the company’s (1) predictable cash flow from its regulated business, (2) exposure to thermal coal prices for its Mundra project and Indonesian coal mines, (3) growing renewable energy business, and (4) moderately high financial leverage,” says Abhishek Tyagi, a Moody’s Vice President and Senior Credit Officer.
“The rating also benefits from Tata Sons Ltd.’s (Tata Sons) 45.2% ownership in Tata Power and its track record of supporting the company,” adds Tyagi.
Tata Power’s Ba2 ratings include a one-notch uplift based on Moody’s assessment that the company will likely receive support from its major shareholder, Tata Sons, if needed.
Tata Power’s regulated operations in Mumbai and Delhi support the company’s consolidated financial profile. The recent acquisition of distribution companies in the state of Odisha has further increased the footprint of its regulated business. Tata Power’s regulated business contributed 57%-58% of the company’s EBITDA over the past two years, and Moody’s expects a similar contribution over the next two to three years.
Tata Power’s ratings consider the growth in its regulated and renewable energy businesses, which are more predictable and less volatile, and thus, reduce the impact of the company’s commodity price-driven businesses, including coal mines in Indonesia and the Mundra power project in India.
Tata Power has improved its leverage, as measured by cash flow from operations pre working capital after dividends to debt (CFO pre-WC — dividends /debt), from 5.0% in the year ended 31 March 2019 (fiscal 2019) to 10.2% in fiscal 2021. Moody’s expects Tata Power leverage to remain moderately high and its (CFO pre-WC — dividends)/debt to be in the range of 7.0%-8.5% over the next three years.
Tata Power’s credit profile considers its high carbon transition risk because a significant part of its generation business is reliant on coal-fired generation (69.5%). However, Tata Power’s commitment to not add any new coal-based capacity, phase out the existing ones once their power purchase agreements expire and significantly increase its renewable energy footprint provides clarity regarding its carbon-transition plan.
The Ba2 rating factors in moderate governance risk given the concentrated shareholding of Tata Sons. However, this risk is partially tempered by the experienced management team, which is further supported by experienced board members in the areas of corporate governance, business strategy, and operational and financial capabilities, among others.
RATIONALE FOR STABLE OUTLOOK
The stable outlook is based on Moody’s expectation that Tata Power’s underlying business and financial profile will remain steady and that Tata Sons will support the entity if required.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Tata Power’s rating could be upgraded if the company improves its credit metrics such that (CFO pre-WC — dividends)/debt is above 8% on a consistent basis.
Tata Power’s rating could be downgraded if (CFO pre-WC — dividend)/debt is below 5% on a sustained basis. The rating could also face downward pressure if Tata Power undertakes substantially debt-funded acquisitions that breach these metrics or significantly raise business risks for the company, or both.
The Tata Power Company Limited (TPC) is one of the largest private-sector power utilities in India, with an installed generation capacity of 12,808 megawatts as of September 2021. The company’s business operations include power generation from thermal, hydro, solar and wind sources, transmission and distribution. The company also owns coal mines in Indonesia and a license for coal mining in Russia.
Tata Sons Ltd. (Tata Sons) is the single-largest shareholder of TPC, with a 45.21% stake as of September 2021. TPC’s market capitalization was INR738 billion as of 3 November 2021.
Coastal Gujarat Private Limited (CGPL) is a significant part of the TPC group. CGPL’s installed capacity of 4.15 gigawatts (GW) accounts for about 32.4% of TPC’s total installed generation capacity.
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